How boards can prepare for short-selling attacks

What a short-selling attack looks like 

In an attack scenario, the short seller usually takes a sizable short position in a targeted organization, then attempts to drive the share price down by releasing unfavorable information about that organization. When the share price falls as a result, the short seller profits. Given their financial motivation and the potential financial gains, short sellers may be selective by using information that is skewed or misleading.   

Short-selling attacks are more common in bear markets where a short seller will make the most money. Given the current global economic environment with volatile markets, an increase in short-selling attacks may not be surprising. Social and digital media exacerbate the impact by enabling bad news to travel faster and further than before.  

The board and management should look out for several indicators of a short-selling attack:

• A rapidly increasing short position in the organization (typically movements in excess of 10% of the overall shares)
• An increase in whistle-blower reports or allegations regarding financial reporting matters
• Increased requests from regulators for further information (in combination with the other indicators listed here)
• A significant increase in shareholder, customer or employee activism
• Direct or industry competitors experiencing short-selling attacks
• An abrupt or unexplained departure of the CFO or other C-suite executives
   

How to prepare for a possible short-selling attack

As legal challenges, jurisdictional complexities and high costs often make it difficult for organizations to have recourse against short sellers, being prepared in advance of a short-selling attack is crucial.

The board and management need to proactively strategize how to best defend the organization against such attacks and take practical steps. These include assessing industry trends, financial intelligence and potential risk areas, as well as monitoring market sentiment of the organization continually.

It is also important to pay attention to the abovementioned short-selling attack indicators and how these change over time. The organization should then develop pre- and post-attack strategies based on industry trends and in response to changes in these indicators to deal with such incidents. This should focus on identified risk areas, similar to preparation for a potential cyberattack.

The organization should also consider engaging the right team of external advisors and involving it early in the process of developing these strategies. This includes bringing in a third party to provide an independent assessment of key risk areas or advise on the preparation and coordination of responses.

What success looks like

Success against a short-selling attack could take various forms and depends on the nature of engagement with the short seller. For example, the company’s share price may return to pre-attack levels, reflecting the market’s confidence in the organization’s communications or favorable reports. Or there may be no further engagements with the short seller after the initial report and response (short sellers typically issue multiple reports on a company in their campaign). Another successful outcome could be an independent forensic investigation that exonerates the company from key allegations of fraud and the company takes the opportunity to improve transparency in its financial reporting and disclosure practices. While uncommon in the Asia-Pacific region, legal action against misleading and deceptive conduct may also be taken against the short seller.

The success stories of companies in dealing with short-selling attacks should hopefully provide the board and management with greater confidence in devising a robust approach to handling short-selling attacks. The value in being vigilant and ready to respond to potential short seller allegations and misstatements cannot be overstated. How listed companies prepare for potential short-selling attacks could mean the difference between survival and collapse of the organization.